SHIELD Act aims to reduce speculative patent suits

Notice of a patent infringement suit is never a welcome message. Even worse is realizing the plaintiff is not one of your company’s competitors, but instead is a “non-practicing entity” (NPE) —a holding company that has bought the patent just for the purpose of suing you. While fellow industry players can be fierce, ruthless competitors, counsel for both sides also recognize that their respective businesses have customers to serve and that patent litigation is ancillary and distracting to their core businesses. This usually leads to cooler heads finding ways to avoid most intra-industry patent infringement claims.

Not so with non-practicing entities. Litigation is their business, so strategic options like cross-licensing or a retaliatory infringement suit are generally not available to the operating company defendant. The NPE is looking for money, either via a large jury award or a settlement.

The bipartisan SHIELD Act (Saving High-tech Innovators from Egregious Legal Disputes) recently proposed by Reps. Peter DeFazio and Jason Chaffetz aims to provide new protection for companies accused of patent infringement by NPEs. The headline-grabbing core of the bill would require NPEs that lose in court to pay the legal costs and fees of the accused infringer.

In addition to the “loser pays” feature, the bill would allow defendants to move early in litigation for a ruling on whether the plaintiff is an NPE. In order to avoid loser-pays liability, the plaintiff must prove it fits in one of the following categories:

The original inventor or assignee of the patent being asserted

A university or a university technology transfer organization

It has made a “substantial investment” in exploiting the asserted patent through production or sale of an item covered by the patent.

If the defendant files its motion early enough, the court would limit discovery to that necessary to determine if the plaintiff should be considered an NPE. And, if the court determines the plaintiff does not fit in one of the above three classifications, the plaintiff would be required to post bond in an amount determined by the court to cover the defendant’s legal costs. Given the cost to defend a patent infringement claim, the requirement to post bond could be significant to thinly capitalized NPEs. The early determination of NPE status with limited discovery would also provide defendants some measure of strategic perspective in making the economic choice to either defend or settle the case.

The bill attempts to comport with the good ethical and legislative principle “do no harm.” That is, it protects innovators seeking to assert meritorious infringement cases while limiting cases of questionable merit. By exempting original inventors, universities and patent owners that have made a significant investment, innovators and real market participants will go about their business unaffected by the new law.

The bill also represents an effort to help American manufacturers fight back. Companies would no longer feel compelled to settle a spurious patent infringement claim simply because the cost to defend would result in a net “loss” financially. And the bill appropriately leaves implementation to those closest to patent litigation—federal district court judges—instead of attempting to prescribe detailed, inflexible rules. It will allow district judges to make fact-specific decisions about whether the plaintiff will be liable for the defendant’s costs and the bond amount a particular plaintiff is required to post.

For the SHIELD Act there is still work to be done and questions to be answered. NPEs are savvy strategic players in patent litigation, from how they acquire patents to how they target companies with infringement claims. It will be a challenge to limit inflated damage claims sought by NPE plaintiffs by introducing for them a risk of having to cover defendants’ legal costs. And there is still room for debate about how NPEs should be best defined—a workable definition has thus far eluded practitioners, legislators and the courts. Perhaps most importantly the question remains whether it is the role of our laws to single out a class of actors, rather than targeting directly the behavior we find objectionable.

Nonetheless, the SHIELD Act is a good platform on which to have a principled discussion about reducing low-quality patent infringement suits. Given the many innovative products and services brought on by our patent system over the last 200-plus years, we must not be too quick to make drastic changes in response to a new challenge to the system. Thoughtful, narrowly tailored legislation such as this bill may be the right tool to finding the balance between a robust patent system and wasteful infringement litigation.